Journal Entries for Change in Profit Sharing Ratio

The given problem requires us to record journal entries to reflect a change in the profit sharing ratio between partners X, Y, and Z. The entries will be made as at 1st April 2020, the effective date of the new profit-sharing ratio. Let us record the entries step by step.

Step 1: Revaluation of Assets and Liabilities

Before we can record the entries for the change in profit sharing ratio, we need to revalue the assets and liabilities of the firm as on 31st March 2020 to reflect the new ratio. The revaluation will be done in the following manner:

Assets:
- Advertisement suspense account: 50,000

Liabilities:
- General reserves: 75,000
- Profit and loss account: 37,500
- Workmen compensation reserve: 12,500

Total: 1,75,000

New profit-sharing ratio: 2:3:5

X's share: 2/10 x 1,75,000 = 35,000
Y's share: 3/10 x 1,75,000 = 52,500
Z's share: 5/10 x 1,75,000 = 87,500

Step 2: Record the Revaluation Entries

To record the revaluation entries, we will pass the following journal entry:

Particulars Debit Credit
Advertisement suspense A/c 50,000
To General reserves A/c 10,000
To Profit and loss A/c 6,000
To Workmen compensation reserve A/c 4,000
To X's capital A/c 3,500
To Y's capital A/c 5,250
To Z's capital A/c 8,750

(Being the assets and liabilities revalued as per the new profit sharing ratio)

Step 3: Record the Change in Profit Sharing Ratio

To record the change in profit sharing ratio, we will pass the following journal entry:

Particulars Debit Credit
X's capital A/c 4,500
Y's capital A/c 6,750
Z's capital A/c 11,250
To X's current A/c 1,000
To Y's current A/c 1,500
To Z's current A/c 2,500

(Being the adjustment made for the change in profit sharing ratio)

Explanation:

- In Step 1, we have revalued the assets and liabilities of the firm as on 31st March 2020 to reflect the new profit sharing ratio of 2:3:5.
- In Step 2, we have recorded the revaluation entries to adjust the values of the assets and liabilities as per the new ratio. We have debited the Advertisement suspense account and credited General reserves, Profit and loss account, Workmen compensation reserve, and the individual capital accounts of X, Y, and Z.
- In Step 3, we have recorded the entries for the change in profit sharing ratio. We have debited the individual capital accounts of X, Y, and Z and credited their respective current accounts. The amounts credited to the current accounts represent the share of profits that will be paid to the partners as per the new ratio.

Profit/loss a/c (GR)(wcr) Dr. 75000. To X (37500cr) To y( 22500cr) To z( 15000cr)